“Someone paying 40 basis points and someone else paying 20 basis points for the same fund is easy to see and measure,” said Tobe, who claimed that fiduciaries who choose more expensive funds for an investor when less expensive shares of the same fund are available can find themselves in violation of their fiduciary duty under U.S. Department of Labor and Securities and Exchange Commission regulations and ERISA.
He also notes that numerous judges have ruled that a prudent fiduciary should make institutional shares available to clients. Even the Supreme Court unanimously issued an opinion [Tibble v Edison] in 2017 which stated that "a plaintiff may allege that a fiduciary breached a duty of prudence by failing to properly monitor investments and remove imprudent ones.”
Between 2009 to 2018, rollovers from employer-sponsored retirement plans accounted for more than 95% of traditional IRA inflows each year, so the number of investors subject to increased costs is significant, Pew said.
To demonstrate the costs to investors further, the organization calculated the costs of a rollover for an employee about to retiree. In the hypothetical case study, the investor is retiring at age 65, has $250,000 in her employer’s 401(k) plan and is deciding whether to keep the money there or roll it over into an IRA.
Using an assumed rate of return of 5% annually and a withdrawal rate of $1,000 a month, Pew assumed that the annual fees for retail shares of the fund in the IRA is 0.65%, while leaving the same the funds in the institutional shares in her 401(k) plan would cost 0.45%.
The impact of the higher fund fees for retail shares in an IRA are stark over a 25-year period. If the investor leaves her money in her 401(K) invested in institutional shares, she’ll have $261,015 at age 90, while the retail share costs cut her IRA balance to $123,385, Pew found
“In summary, rolling over her savings to the mutual fund with the higher fee would mean $137,630 less in her account balance when she is 90. Because the higher fees erode subsequent gains, the magnitude of the reduction in savings is even more substantial than the magnitude of the fee increase,” Pew said.